Sterling to 'Lose Contest of Uglies': HSBC

With fears over the U.S. "fiscal cliff" calmed and the euro zone debt crisis having abated somewhat, there is pain coming for sterling this year, according to HSBC's currency strategist.

David Bloom, Global Head of FX Strategy, said in his Currency Outlook 2013 report that sterling's frailties are set to emerge from the shadows in 2013 as a number of factors combine to highlight the currency's weak points.

"The shortcomings faced by sterling will no longer be in the shadows of monumental threats. The U.S. has stepped back from the fiscal cliff and the fears of the euro zone break-up appear to have diminished," Bloom said.

He added that the "Teflon" currency's fortunes will change after being "remarkably impervious to bad news on economic activity, the fiscal challenge and monetary easing over the last few years," he said. The term "Teflon currency" refers to currencies to which no bad economic news seem to stick.

Bloom outlines the testing cocktail of threats which will undermine sterling in 2013. Fiscal credibility is under threat at a time when the real pain of adjustment is only just beginning, a sovereign downgrade looms and the potency of monetary policy is being questioned, he says. In addition, the Bank of England faces a leadership change in July. All of these combined leave"sterling's frailties to emerge from the shadows and lose the contest of the uglies."

Bloom states that despite being in an austerity cycle,borrowing is already 7 percent higher than for the same period last year. The "generous market spirit will be increasingly challenged", he says, suggesting that analysts have not been gloomy enough about the U.K.'s economic health.

Ratings agencies are concerned that the U.K.'s debt dynamics have shifted, with S&P hinting that a downgrade is possible if fiscal performance weakens beyond expectations. Fitch stated that the U.K. government's debt-to-GDP target, which it was now expected to miss, "weakens the credibility of the U.K.'s fiscal framework", and Moody's echoed this sentiment.

The U.K. has also had the advantage of being able to print its own money. Monetary stimulus in the form of "quantitative easing" (QE) has been put into action a number of times since the financial crisis started, totaling around 375 billion pounds of bond purchases($602 billion).

Bloom states that HSBC economists do not think there will be any additional QE in the U.K. He said it could be a problem for sterling if "the BoE does not believe QE is warranted or any longer useful."